Rates on popular home loans have fallen by a third since the summer, knocking £125 off the monthly interest cost of a £150,000 mortgage.

Although the HSBC deal launched yesterday requires a 40 per cent deposit and will be chiefly picked up by existing home owners looking to renew their mortgage, experts said the price war would eventually filter through to the first-time buyer market as well.

“There is a price war among mortgage lenders – the first since before the credit crisis,” said Ray Boulger of John Charcol, the mortgage brokers. “Lenders are genuinely competing for business.”

He said one sign of this was banks offering particularly cheap mortgage deals for a limited time only in an attempt to drum up immediate business.

“Banks do this when they really want to encourage borrowers to sign the mortgage contract,” said Mr Boulger. “There’s nothing like a deadline for focusing minds.”

Experts said other lenders would follow suit, which would spark some life back into the moribund property market.

Unlike other low-rate deals on offer recently, HSBC has not set a deadline and has a reputation for having low rates on offer for a longer period of time.

“HSBC’s previous strategy has been to keep deals around for a while. We can therefore see expect to see this deal on the market into the New Year,” said Mr Boulger.

HSBC’s new mortgage could see borrowers pay less than £250 a month for a £150,000 mortgage. The monthly repayments on such a loan on an interest-only basis would be £248.75, according to David Hollingworth of London & Country Mortgages. On a repayment basis the cost would be £635 a month. On a £250,000 interest-only mortgage — the maximum allowed under the deal — the figure would be £414.58.

The deal does, however, come with an arrangement fee of £1,999.

Santander offered a two-year fixed-rate mortgage at 1.99 per cent for a week only – it was withdrawn on Thursday, and only available through a broker and therefore liable for extra fees.

HSBC’s home loan is now the joint lowest ever to have been available on the open market, matching a deal that Tesco offered last month.

Accord has a competitive five-year loan offer at 3.09 per cent, available for just 10 days until next Thursday.

The price war has been sparked by a Government scheme that allows lenders to borrow at rock-bottom rates from the Bank of England.

Before the initiative, which is called the Funding for Lending or FLS, came into effect in the summer, the best rate for a two-year fixed rate mortgage for borrowers with plenty of equity was 2.99 per cent from Woolwich.

The best rate now is just 1.99 per cent, meaning interest rates on these home loans have been cut by a third in just a matter of months.

For five-year fixed-rate deals, best buy rates have fallen from 3.69 per cent, offered by Nottingham Building Society over the summer, to 2.79 per cent from the Post Office now.

The effect on trackers, which mirror the Bank of England base rate, has been less marked.

Mr Hollingworth said: “Even from the first half of this year, these new mortgage deals are a total turnaround. Lenders are hungry for business, which is great news for consumers.

“We can expect to see more deals of this nature as other lenders scramble to compete with these rock bottom prices.

The number of mortgage deals on the market has increased by 17 per cent since August, according to Moneysupermarket.com.

Mortgage approvals rose to a 10 month high last month, to 52,982. Before the Funding for Lending scheme was launced in August, July mortgage approvals sat at just 47,927.

But first-time buyers, who often can scrape together no more than a 10 per cent deposit, have not benefited so much from the Bank of England scheme.

The cheapest five-year fix for these borrowers before the FLS came in was 5.6 per cent from Coventry Building Society; the current best buy costs 4.79 per cent from NatWest.

“Lenders like the safety of lending to people with 40 per cent equity in their homes, but if the rates fall too far they are not making much profit,” said Mr Boulger.

“This is when they start eyeing the bigger profit margins on offer in the first-time buyer market and decide to compete there as well. Such competition will, of course, drive rates down.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Rates are slowly coming down for those with smaller deposits as well so while first-time buyers are still being charged a premium on their mortgage rates, the situation is much better than it was several months ago, and is likely to get even better next year.

“While 30 lenders have taken advantage of the Funding for Lending scheme, only a handful are really offering rock-bottom rates so we should see others join the party and cut their rates next year.”